Market Momentum: Theory and Practice (The Wiley Finance Series)

A one-of-a-kind reference guide covering the behavioral and statistical explanations for market momentum and the implementation of momentum trading strategies Market Momentum: Theory and Practice is a thorough, how-to reference guide for a full range of financial professionals and students. It examines the behavioral and statistical causes of market momentum while also exploring the practical side of implementing related strategies. The phenomenon of momentum in finance occurs when past high returns are followed by subsequent high returns, and past low returns are followed by subsequent low returns. Market Momentum provides a detailed introduction to the financial topic, while examining existing literature. Recent academic and practitioner research is included, offering a more up-to-date perspective. What type of book is Market Momentum and how does it serve a range of readers’ interests and needs? A holistic market momentum guide for industry professionals, asset managers, risk managers, firm managers, plus hedge fund and commodity trading advisors Advanced text to help graduate students in finance, economics, and mathematics further develop their funds management skills Useful resource for financial practitioners who want to implement momentum trading strategies Reference book providing behavioral and statistical explanations for market momentum Due to claims that the phenomenon of momentum goes against the Efficient Markets Hypothesis, behavioral economists have studied the topic in-depth. However, many books published on the subject are written to provide advice on how to make money. In contrast, Market Momentum offers a comprehensive approach to the topic, which makes it a valuable resource for both investment professionals and higher-level finance students. The contributors address momentum theory and practice, while also offering trading strategies that practitioners can study. Cover Title Page Copyright Contents Contributors Introduction CHAPTER 1 Behavioural Finance and Momentum 1.1 Introduction 1.2 The failure of risk‐based explanations 1.3 Behavioural models of momentum 1.4 Slow information diffusion 1.5 Patterns in information arrival 1.6 The 52‐week high and capital gains overhang 1.7 Institutional trading and momentum profits 1.8 Sentiment and momentum 1.9 Discussion References CHAPTER 2 A Taxonomy of Momentum Strategies 2.1 Introduction 2.2 Relative strength strategies 2.3 Time‐series momentum strategies 2.4 Cross‐sectional momentum strategies 2.5 Cross‐asset momentum References CHAPTER 3 Demystifying Time‐Series Momentum Strategies: Volatility Estimators, Trading Rules and Pairwise Correlations 3.1 Data Description 3.2 Methodology 3.3 Turnover Reduction 3.4 The Recent Underperformance of Time‐series Momentum Strategies and the Effect of Pairwise Correlations 3.5 Trading Costs Implications 3.6 Concluding Remarks 3.6 Acknowledgements References CHAPTER 4 Risk and Return of Momentum in Developed Equity Markets 4.1 Introduction 4.2 Definition of momentum 4.3 Simple factor portfolios 4.4 Multifactor structure 4.5 Pure factor portfolios 4.6 Empirical results: momentum performance 4.7 Empirical results: momentum risk 4.8 Diversification benefits 4.9 Summary References CHAPTER 5 Momentum Across Asset Classes 5.1 Measuring momentum 5.2 Framework: equity momentum and corporate credit risk 5.3 Empirical studies: momentum and credit risk 5.4 Our research on equity momentum and bond returns 5.5 Geographically bound assets 5.6 Momentum in other illiquid assets 5.7 Cross‐asset class effects of commodities 5.8 Momentum effects and taxable investors 5.9 Active management and momentum effects 5.10 Conclusions References CHAPTER 6 Momentum in Momentum ETFs 6.1 Introduction 6.2 Why are momentum ETFs so popular? 6.3 What is in a momentum ETF? 6.4 Which factors drive active risk for momentum ETFs? 6.5 From constrained to unconstrained strategies 6.6 Conclusions References CHAPTER 7 CTA Momentum 7.1 Introduction 7.2 Time‐series momentum (TSM) 7.3 Strategy return models 7.4 Time‐series momentum 7.5 TSM meets CSM with two instruments 7.6 Conclusions 7.A.1 Appendix A: Correlation parameter restrictions 7.A.2 Appendix B: Proofs of variances and covariance References CHAPTER 8 Overreaction and Faint Praise – Short‐Term Momentum in Contemporary Art 8.1 Introduction 8.2 Contemporary art market ecosystem 8.3 ArtForecaster data 8.4 Systematic forecasting strategies 8.5 Conclusions References CHAPTER 9 Volatility‐Managed Momentum 9.1 Introduction 9.2 Data and momentum portfolio construction 9.3 Volatility‐managed momentum strategies 9.4 Some potential practical issues 9.5 The best volatility measure for momentum? 9.6 Concluding remarks References CHAPTER 10 Theoretical Analysis of the Fama‐French Portfolios 10.1 Introduction 10.2 Strategies, notation and preliminaries 10.3 Distribution of Fama‐French factors 10.4 Fama‐French factors with sequential sorting 10.5 Conclusion 10.A.1 Proof of Lemma 1 10.A.2 Proof of Theorem 3 10.A.3 Proof of Theorem 4 References CHAPTER 11 Exploiting the Countercyclical Properties of Momentum and other Factor Premia – A Cross‐Country Perspective 11.1 Introduction 11.2 Methodology 11.3 Alternative investment strategies 11.4 Quantifying the utility of risk premia strategies 11.5 Summary and conclusions 11.5 Acknowledgement References CHAPTER 12 Time‐Series Variation in Factor Premia: The Influence of the Business Cycle 12.1 Introduction 12.2 Factors and factor rotation 12.3 Factors and the business cycle 12.4 Data and summary statistics 12.5 Empirical results 12.6 Conclusions 12.A.1 Derivation of cash‐flow news series 12.A.2 US leading economic indicator and global risk appetite indicator 12.A.3 Dynamic multifactor strategy: extension to other market segments and regions 12.3 Acknowledgements References CHAPTER 13 Where Goes Momentum? 13.1 Introduction 13.2 Momentum strategies 13.3 Data 13.4 Method 13.5 Results 13.6 Risk‐adjusted after‐transaction costs performance of time‐series and cross‐sectional momentum strategies 13.7 Conclusions References CHAPTER 14 Time‐Series Momentum in Credit: Machine Learning Approach 14.1 Introduction 14.2 The philosophy of artificial intelligence 14.3 Vanilla time‐series momentum 14.4 Generalized linear models (GLM) – Lasso, Ridge and Elastic Net 14.5 Determining optimal hyper‐parameters via cross‐validation 14.6 Results: generalized linear models 14.7 Random forests 14.8 Neural networks 14.9 Results and comments 14.10 Conclusion References CHAPTER 15 Momentum and Business Cycles 15.1 Introduction 15.2 Momentum, business cycles and realised market return 15.3 Momentum and expected market risk premiums 15.4 Momentum, overconfidence and sentiment 15.5 Summary and conclusions 15.5 Acknowledgement References CHAPTER 16 Momentum as a Fundamental Risk Factor 16.1 Introduction 16.2 Defining momentum as a strategy 16.3 A new framework 16.4 From realised returns to forecast returns 16.5 Examining behaviour 16.6 The momentum trader as a bystander 16.7 Extending the model 16.8 Short‐term versus long‐term investors 16.9 The impact of the short‐term investor 16.10 The momentum risk premium 16.11 The Apollo asset pricing model 16.12 Momentum alpha 16.13 Beta momentum 16.14 Beta signal 16.15 Momentum strategies 16.16 Results 16.17 Analysis of results 16.18 Conclusions References CHAPTER 17 Momentum, Value and Carry Commodity Factors for Multi‐Asset Portfolios 17.1 Introduction 17.2 Methodology and key research questions 17.3 Commodity factors – insights from the historical data 17.4 Wealth accumulation strategies and rebalancing considerations 17.5 Wealth decumulation strategies 17.6 Long/short versus long only strategies 17.7 Completion portfolios versus maximum Sharpe ratio portfolios 17.8 Conclusions 17.A.1 Momentum factor 17.A.2 Carry factor 17.A.3 Value factor 17.A.4 From commodity factors to factor portfolios 17.A.5 Factor construction References Index EULA

A one-of-a-kind reference guide covering the behavioral and statistical explanations for market momentum and the implementation of momentum trading strategies

Market Momentum: Theory and Practice is a thorough, how-to reference guide for a full range of financial professionals and students. It examines the behavioral and statistical causes of market momentum while also exploring the practical side of implementing related strategies.

The phenomenon of momentum in finance occurs when past high returns are followed by subsequent high returns, and past low returns are followed by subsequent low returns. Market Momentum provides a detailed introduction to the financial topic, while examining existing literature. Recent academic and practitioner research is included, offering a more up-to-date perspective.

What type of book is Market Momentum and how does it serve a range of readers’ interests and needs?

• A holistic market momentum guide for industry professionals, asset managers, risk managers, firm managers, plus hedge fund and commodity trading advisors
• Advanced text to help graduate students in finance, economics, and mathematics further develop their funds management skills
• Useful resource for financial practitioners who want to implement momentum trading strategies
• Reference book providing behavioral and statistical explanations for market momentum

Due to claims that the phenomenon of momentum goes against the Efficient Markets Hypothesis, behavioral economists have studied the topic in-depth. However, many books published on the subject are written to provide advice on how to make money. In contrast, Market Momentum offers a comprehensive approach to the topic, which makes it a valuable resource for both investment professionals and higher-level finance students.

The contributors address momentum theory and practice, while also offering trading strategies that practitioners can study. **A one-of-a-kind reference guide covering the behavioral and statistical explanations for market momentum and the implementation of momentum trading strategies** __Market Momentum: Theory and Practice__ is a thorough, how-to reference guide for a full range of financial professionals and students. It examines the behavioral and statistical causes of market momentum while also exploring the practical side of implementing related strategies. The phenomenon of momentum in finance occurs when past high returns are followed by subsequent high returns, and past low returns are followed by subsequent low returns. __Market Momentum__ provides a detailed introduction to the financial topic, while examining existing literature. Recent academic and practitioner research is included, offering a more up-to-date perspective. What type of book is __Market Momentum__ and how does it serve a range of readers’ interests and needs? * A holistic market momentum guide for industry professionals, asset managers, risk managers, firm managers, plus hedge fund and commodity trading advisors * Advanced text to help graduate students in finance, economics, and mathematics further develop their funds management skills * Useful resource for financial practitioners who want to implement momentum trading strategies * Reference book providing behavioral and statistical explanations for market momentum The contributors address momentum theory and practice, while also offering trading strategies that practitioners can study. "Broadly, financial market momentum occurs when past high returns are followed by subsequent high returns, while past low returns are similarly followed by subsequent low returns. It is claimed that the momentum phenomenon contravenes the Efficient Markets Hypothesis. Consequently, it has been the subject of considerable study by behavioral economists. There are many books already published on momentum, but they have in common the characteristic that they are written by practitioners and aim to tell people how to get rich. There is a gap in the market for a holistic approach to the topic for both investment professionals and higher-level students, focusing on behavioral and statistical explanations for momentum, while also exploring the practical side of implementation"-- Provided by publisher